Bigger is better in wealth management. Except when it’s not

When it comes to wealth management, banks in recent months have been bulking up or thinning out.

The reasons for the two decisions are similar, even though one involves acquisitions and the other divestitures: Success in wealth management demands sizable market share, so banks either have to become big, broad-based players or carve out a niche they can dominate.

Consider recent deals by two banks. The $162 billion-asset Citizens Financial Group in Providence, R.I., this month agreed to buy Clarfeld Financial Advisors to beef up in ultrahigh-net-worth clients. In contrast, the $8.3 billion-asset Boston Private Financial Holdings has sold or agreed to sell two wealth advisers this year in an effort to de-emphasize independently managed affiliates and focus on its core wealth management offering.

Those transactions and others show that bank management teams know they must get their product mix and strategic focus exactly right, said Alois Pirker, research director for wealth management at Aite Group. New regulations and rapid tech advances in money management require it, he said.

“You see banks going in both directions, buying and selling, and doing a lot of thinking about what their strategy should be,” Pirker said. “Some are moving from a narrow product offering to a broader solution set. Others have decided they don’t want to be just an also-ran.”

The ingredients are there to stimulate buying. Banks are flush with capital and tax savings, fueling their ability to spend. Regional banks are not pursuing major acquisitions now because of the recent decline in bank stocks. Acquisitions of smaller, specialized businesses like wealth managers make more sense.

Moreover, commercial loan demand is tepid, and deposit costs are expected to start eating into loan margins; buying a wealth management firm is a good way to add fee income.

Executives at the $13.3 billion-asset Union Bankshares in Richmond, Va., had that in mind with three recent deals, said Casey Whitman, an analyst at Sandler O’Neill. The bank’s acquisitions of Access National Bank and two additional wealth management firms should help it bolster noninterest income, which is now about 16% of total revenue, below Union’s peer banks, Whitman said in an Oct. 8 research note. Access owns the wealth manager Middleburg.

“From a growing-revenue-stream standpoint," Middleburg is "an extremely well-regarded wealth manager,” CEO John Asbury said in an Oct. 5 conference call.

The heightened importance of noninterest income is also why the $14.9 billion-asset First Midwest Bank in Chicago decided to acquire Northern Oak Wealth Management in Milwaukee, said Bob Diedrich, head of wealth management.

“Frankly, it helps us diversify our revenue streams,” Diedrich said. “The Chicagoland market is tough from a competitive perspective, and having a different revenue stream that’s growing at a nice clip is meaningful.”

First Midwest has seen some of its other fee income sources decline as a result of regulations. When the company crossed the $10 billion-asset threshold in 2016, it became subject to the Durbin amendment’s cap on interchange fees.

“The Durbin amendment really impacted us pretty heavily,” Diedrich said.

Still, there are reasons for other banks to pare back in wealth management and focus on a narrower subspecialty.

Some regulations have made it too expensive to just dabble here and there, Pirker said. Banks must train staff to comply with the fiduciary rule, which requires wealth managers to work in their customers’ best interests, he said.

“With these regulations, it’s obvious you’ve got to upgrade your systems, or you’re better off selling the business,” Pirker said.

Nonbank competition to buy wealth management firms, especially from private equity, makes an acquisition strategy pricey, said Chip Roame, managing partner at Tiburon Strategic Advisors, a bank consulting firm. Last month, the private-equity firm Hellman & Friedman acquired Financial Engines for $3 billion and merged it with Edelman Financial Services.

So expect the shakeout to continue, observers say.

Capital One Financial this year sold its trust and asset management unit to the $28 billion-asset Hancock Whitney in Gulfport, Miss. But the $9.8 billion-asset Axos Financial in San Diego last month agreed to buy WiseBanyan, a maker of robo-advisory software.

“We think they’re a perfect fit for Axos’ technology-enabled consumer banking and wealth management services model,” Axos CEO Gregory Garrabrants said in an Oct. 24 conference call. “The integration of robo-advisory services is important to the success of our universal digital bank.”